KEY POINTS:
Business confidence went from bad to worse last month, according to the National Bank's business outlook survey.
Not only did firms' views of the general business environment deteriorate, their expectations of their own activity sank further into the red.
"Not since 1988, and the start of the survey, have we seen five successive months where firms' own activity expectations have been negative," the bank's chief economist, Cameron Bagrie, said.
"To say things are stagnant would be overly positive."
Employment intentions continued the downward trend evident since late last year. A net 14 per cent of firms expect reduced staff numbers over the year ahead.
"Firms are seeing no sales growth and a lot of pressure on costs and that means a deteriorating bottom line. They are now at a juncture where they are being forced to react. I think we will be surprised how quickly the unemployment rate goes up."
Profit expectations lurched lower with a net 27 per cent of firms expecting lower profitability, compared with a net 19 per cent in June.
Investment intentions have also slipped, but export intentions improved, possibly reflecting a more favourable exchange rate with Australia.
The survey showed the economy to be firmly in contraction mode, Bagrie said, deteriorating not stabilising.
The services sector historically tended to swing around less through the cycle than the economy as a whole, but not this time.
"They are now caught up in the rip," Bagrie said. "No one is immune."
Inflation expectations rose markedly, to 3.67 per cent from 3.49 per cent in June, and a net 43 per cent of firms said they intend to raise their own prices, up from 41 per cent a month earlier.
But Bagrie said the survey responses came in during the first half of the month and therefore the effects of falling petrol prices would not be reflected until next month's survey.
The economy was going through the fundamentally desirable process of shifting its weight from the spending to the earning side, he said.
As the going got tough firms were re-examining their business models and cost structures and focusing on productivity.
And raising productivity was the key to higher living standards, he said.
Not so confident
National Bank's business outlook survey for July:
* A net 14 per cent of firms expect to reduce staff in the next year.
* A net 27 per cent expect lower profits.
* 43 per cent of firms intend to raise their prices.
